Jerry S. Payne - Page 23

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          Regs.  Specifically, respondent suggests that JKP’s sale of the             
          club’s operation within 3 months of its acquisition “creates a              
          strong inference” that the sale occurred as part of an overall              
          plan commencing with the transfer of the operation from 2618 to             
          JKP and ending with the sale to outsiders.  See sec. 1.368-                 
          1(d)(5), Example 5, Income Tax Regs.  Alternatively, respondent             
          argues that, even if we decide that the transfer of the club’s              
          operation from 2618 to JKP qualified as either a “D” or “F”                 
          reorganization, petitioner must be deemed to be in receipt of the           
          $40,011 total assets listed on the yearend balance sheet in                 
          Schedule L of 2618's 1989 return (the 1989 return balance sheet).           
          Therefore, he is required to recognize that amount of long-term             
          capital gain pursuant to section 356(a)(1)(B) and (2).                      
               B.  Status of JKP’s Acquisition of the Club as a “D”                   
                    1.  Statutory Requirements                                        
               We find that the club was, in fact, owned and operated by              
          2618, not, as respondent suggests, by petitioner.  The parties              
          have stipulated that 2618 “is a corporation that owned and                  
          operated a topless dance club under the name of Caligula XXI”.              
          They have further stipulated that petitioner’s management                   
          services and involvement in the operation of the club were                  
          pursuant to the March 16, 1987, agreement, which gave petitioner            
          the right to “control and manage” the club’s activities in                  
          consideration of “a management fee for said service.”  That                 

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